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Mandate for Change

Thanks to Wal-Mart and the U.S. Department of Defense, suppliers have to spend millions to put RFID tags on pallets and cases. A money pit? Not if companies get smart.

By Mark Roberti

Jan 01, 2004—There’s been a great deal of gnashing of teeth and wringing of hands ever since Wal-Mart and the U.S. Department of Defense announced that they would require their suppliers to put RFID tags carrying Electronic Product Codes on pallets and cases starting in January 2005. Many suppliers are seething about mandates to use technology that will definitely make their customers more efficient but could blow a gaping hole in their budgets.

How much will it cost suppliers to comply with the requirements from Wal-Mart and the DOD? The price tag will vary for every company, but A.T. Kearney, a management consulting firm owned by EDS, estimates that a grocery manufacturer with $5 billion in sales will have to spend $400,000 to install RFID readers and related infrastructure in each of its distribution centers and as much as $40 million for systems integration across the entire organization. That’s just the beginning. It will also have to absorb the cost of putting 221 million tags on its pallets and cases. That could be $33 million—each year. If the tag price drops from 15 cents to 5 cents, the annual outlay would still be a hefty $11 million. For a company operating on razor-thin margins, that could mean the difference between a profit and a loss.

Wal-Mart and the DOD are asking suppliers to make this investment over a period of several years (Wal-Mart wants tagging to begin in 2005, but suppliers won’t have to tag all cases until the end of 2006). That gives suppliers some time to prepare. So the question is: How can companies deploy RFID in a way that enables them to offset millions of dollars in tag costs annually and get a return on investment?

For starters, forget about mandates. Even if it’s Wal-Mart or the DOD that’s forcing you to deploy RFID, think of compliance as a byproduct of a successful RFID strategy, not an end in itself. “Framing an RFID deployment in the context of responding to Wal-Mart or the Department of Defense forces you into a myopic view of how RFID can be applied to your business,” says Joseph Tobolski, an associate partner at Accenture, a global management and consulting company. “You probably won’t be looking at your organization broadly enough to capture all the benefits.”

And don’t waste time looking for the killer app, because it doesn’t exist. No one benefit will offset the cost of an enterprise-wide RFID system. You’ll have to find incremental benefits in many different areas. It won’t be easy to find $33 million in small savings, but with the right strategy, a little innovation and a willingness to change your business processes, you’ll likely discover that even the most efficient company can find ways to save money and boost productivity. With that in mind, here’s RFID Journal’s battle plan for meeting mandates and making money.

Start with data synchronization. Many of RFID’s potential benefits lie in automating processes between trading partners, such as shipping and receiving. For instance, many manufacturers have to deal with invoice deductions and chargebacks because retailers didn’t get all the items they ordered or didn’t get the right items.

“It costs a manufacturer $250, on average, to research an invoice deduction,” says Pete Abell, cofounder of ePC Group, a consulting firm. “Every load that you ship usually is incomplete or has something wrong. A lot of that should be eliminated by using RFID and making sure the data is synchronized.”

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